The Handbook of Commodity Investing

CHAPTER 27

Commodity Trading Advisors: A Review of Historical Performance

Martin Eling, Ph.D.

Institute of Insurance Economics

University of St. Gallen

In recent years, alternative investments have gained widespread acceptance owing to their interesting risk-return characteristics and their low correlations to traditional asset classes. In this chapter we focus on the alternative asset class called managed futures, which refers to professional money managers known as commodity trading advisors (CTAs). These managers trade a wide variety of over-the-counter (OTC) and exchange-traded forwards, futures, and options in different markets based on a wide variety of trading models.

CTAs have been active in the capital market since 1948, but until the 1970s they represented only a very small market segment.¹ However, with the increasing market for derivatives and short selling, there has been growth within the CTA market. Today, CTAs have approximately $135 billion in assets under management,² making them an important part of the alternative investment industry.

Since the mid-1990s, CTAs have been the subject of much academic research. In the academic literature and in practice the performance of alternative investments is often evaluated by Markowitz's portfolio selection theory and by classical performance measures such as the Sharpe ratio.³ Especially due to the low correlations with traditional investments such as stocks and bonds, managed futures appear very attractive in this model ...